Turn That Frown Upside Down: Making a Distressed Acquisition Profitable

For experienced business buyers, turnaround acquisitions can yield big long-term rewards. But acquiring a troubled target can also pose greater risks than buying a financially sound business. That’s why you need to ensure that you choose a company with fixable problems — and have a detailed plan to address them.

First things first

When seeking a turnaround opportunity, look for a company with hidden values, such as untried territories, poor leadership and outdated strategic plans that could be rejuvenated. Then decide if those opportunities mitigate your acquisition risks and potentially provide enough financial benefits. If you’re financing the deal, your lender may also want to verify that the potential deal is sound.

Also ensure that you understand the target company’s core business — specifically, its profit drivers and roadblocks. Without a clear understanding of this, you may misread the company’s financial statements, misjudge its financial condition and, ultimately, devise an ineffective course of rehabilitative action. This is why many successful turnarounds are conducted by corporate buyers in the same industry as their sellers or by investors (such as private equity funds) that specialize in a particular sector.

Verify the details

Due diligence is an important part of any acquisition, but it’s the make-or-break stage of a turnaround deal. You should use this time to pinpoint the source of your target’s distress (such as maturing products or overwhelming debt) to determine what, if any, corrective measures can be taken. Be prepared to find hidden liabilities — such as pending legal actions — beyond those you already know about.

However, it’s also possible that you’ll unearth potential sources of value, such as tax breaks or proprietary technologies. Benchmarking the company’s performance with its industry peers’ can help reveal where the potential for profit lies.

Proceed with a plan

Before you’ve completed your transaction, determine what products drive revenue growth and which costs hinder profitability. Does it make sense to divest the business of unprofitable products, services, subsidiaries, divisions or real estate? Should you cut staff?

Implementing a longer-term cash-management plan and forecast based on receipts and disbursements is also critical. You can manage each line item of your acquisition’s weekly or daily receipts and disbursements in accordance with profit and loss projections, changes in working capital, and major debt and capital expenditures. With a strong cash-management plan and a thorough evaluation of accounting controls and procedures, you should be able to identify lost revenue opportunities, such as unbilled services. This plan can also help you determine where you might be able to cut costs.

All systems go

To run effective management reports, your accounting and reporting systems must produce the appropriate data. If these systems don’t accurately capture all transactions and list all assets and liabilities, your management team won’t be able to track progress and fully pursue growth opportunities or respond to potential problems.

One troubled manufacturing company, for example, wasn’t tracking future purchase commitments. After the company was acquired, the new owner prepared and circulated among managers a comprehensive commitment and contingency report that helped senior management renegotiate terms of the customer agreements.

Mapping the future

Turning a financially distressed company around is a tall order, which is why you need a strategic plan that provides a map toward revenue growth and improved cash flow. Note that macro- and micro-level planning are equally important, as are short- and longer-term objectives.

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